Establishing Credit

When you apply for a loan or credit card, the creditor wants to know whether you are an acceptable credit risk before deciding whether to extend credit to you.

In order to make this assessment the creditor pulls a copy of your credit report, which shows a history of your loans and credit accounts, the amount of your credit lines, how much you owe, whether you pay your bills on time, collections actions, liens, garnishments and bankruptcy filings.

There are three credit reporting bureaus – Equifax, TransUnion and Experian – each of which maintain a credit report for you, along with a credit "score", which is a 3-digit number designed to be a snapshot of your creditworthiness. If you have bad credit, as indicated by a low credit score, your request for a loan or credit card may be denied or subject to a higher interest rate than someone with good credit.

If you're trying to establish credit for the first time, or if you have bad credit and want to improve your credit score, start by getting a checking or savings account, paying rent and utility bills in full and on time, and assuming some debt you can easily pay back. Perhaps a family member can co-sign for a loan or provide the down payment on your car or home, while you make the monthly payments.

Make a budget and live within your means. Keep track of your bank balance so that you don't bounce checks. Get a credit card, then use it to make inexpensive purchases and pay the bill in full when it arrives. If you can't get a credit card due to poor credit, you can try to get a "secured" or "prepaid" credit card, whereby you make a cash collateral deposit in a specific amount (usually between $200-$300), which then becomes the credit line for your account. So, for example, if your deposit is $300, you can charge up to that amount.

Ask your credit union or bank if they offer a secured credit card. Compare the interest rates and fees between several different creditors and choose the one that offers the best deal. Before you apply, be sure to ask what the total fees are and whether they will be refunded if you're denied a card. Typically, a secured card requires an annual fee and has a higher interest rate than an unsecured card.

The Credit CARD Act of 2009 requires young adults who want their own credit cards to show proof of income or ability to repay credit card debts. As an alternative, parents or other adults must co-sign for anyone under 21 to get credit cards in their own name.

Choosing a Credit Card